Pensions update: No sex please, we're insurers

04 Mar 2011

As expected, the European Court of Justice has banned insurance companies from using gender as a factor in pricing products such as annuities. Although it is based on an analysis of the current law, the ECJ has ruled that, for practical reasons, the ban will not come into force until December 2012.

It is expected that the ban will mean annuity rates for women will improve while those for men will worsen. Annuity rates are usually used when money purchase pension savings are converted into pension income. Existing annuities are not affected under this ruling.

But it's worth remembering that not all women will be better off - where a male member buys a joint life annuity to provide an income for his wife after his death, the widow's pension will be linked to the rate of the man’s annuity. The woman's income will therefore typically be lower as a result of this ruling, which could adversely affect women who do not have pensions of their own and may not have made sufficient national insurance contributions for an adequate state pension.

It remains to be seen whether - and how fast - insurance companies will move towards unisex pricing during the interim period up to December 2012, and whether the effect on rates will be as great as some of the hype in the run up to the judgement. There has been some speculation on whether insurance companies may try to look to other factors such as occupation - or even shoe size! - as a proxy for gender, but such moves are likely to be open to legal challenge.

This ruling makes it all the more important for members to shop around when buying an annuity, especially if some insurers implement unisex annuity rates earlier than December 2012. Employers sponsoring final salary schemes in wind-up may well want to press forward to buy annuities earlier than planned. Trustees of money purchase schemes should also consider the effect on annuities they purchase for members who do not take advantage of the open market option.

The ruling is unlikely to have immediate implications for final salary schemes which use actuarial factors which differ according to a member's sex - for example, in the calculation of transfer values. This practice was approved by the ECJ in a 1991 decision - and the new ruling applies to the providers of insurance and related financial services, rather than pension schemes.

However, final salary schemes often pay a transfer value for a woman which is greater than for a man who has built up the same level of benefit because the scheme’s funding takes account of the woman’s greater life expectancy. For such schemes, the woman will be able to use the transfer value to buy a larger annuity than the man once insurers start using unisex factors.

We can foresee a time when final salary schemes will consider using unisex factors for funding and transfer value calculations to address this anomaly rather than wait for further ECJ cases or EU directives.